Morning Note: Market news and an update from BP.

Market News

Gold climbed above $2,750 an ounce this morning, returning to record levels as markets refocused on a slew of US economic data this week including PCE inflation and payroll figures. Bitcoin has topped $71,000 for the first time since June, while the 10-year Treasury yields 4.27%.

US equities ticked higher last night – S&P 500 (+0.3%); Nasdaq (+0.3%). Ford fell by 6% after hours as it highlighted earnings would be at the low end of its forecast as the company struggles with warranty costs and supply disruptions tied to recent hurricanes. Boeing raised around $21bn in an upsized share sale. The Biden administration finalised curbs on US investment in Chinese chip and AI tech, which will take effect in January.

In Asia this morning, equity markets were mixed: Nikkei 225 (+0.8%); Hang Seng (+0.5%); Shanghai Composite (-1.1%). Chinese EV stocks rose following expectations the government is to boost purchases.

The FTSE 100 is currently trading 0.1% higher at 8,301. HSBC is up 3% following the release of better-than-expected Q3 profits and the announcement of a $3bn share buyback.

The 0.8% decline in UK shop prices in October was more than expected as retailers warn of risks as a result of tomorrow’s budget. Sterling trades at $1.2973 and €1.1996.

Brent Crude steadied at $71 a barrel. The US is seeking up to 3m barrels of oil for its Strategic Petroleum Reserve for delivery from April to May 2025.

Source: Bloomberg

Company News

BP has today released Q3 results which were slightly better than expectations which has been lowered earlier in the month. The company has raised its dividend by 10% and committed to a further $1.75bn quarterly share buyback. The company expects to update on its medium-term plans with the full-year results in February 2025. This will include a review of elements of its financial guidance, including expectations for 2025 share buybacks. In response the shares are down 1% in early trading.

BP is gradually transforming from an International Oil Company (IOC) to an Integrated Energy Company (IEC), with greater focus and increased efficiency. The group is planning to deliver at least $2bn of cash cost savings by the end of 2026 relative to 2023, around 10% of the total. This will be driven by high grading its portfolio, digital transformation, supply chain efficiencies, and the use of global capability hubs.

By the end of the decade, the company aims to have built a portfolio of transition growth engines (TGEs), with investment expected to reach $7bn-$9bn a year in 2030. Half will be invested where BP has established businesses, capabilities, and track record – bioenergy, convenience, and EV charging – with the other half in hydrogen and renewables & power. EBITDA (i.e., cash profit) from TGEs is expected to grow to $3bn‑$4bn in 2025 and $10bn-$12bn in 2030 (i.e. 20% of group profit).

BP is not abandoning hydrocarbons – far from it. Instead, it is ‘high-grading’ its business towards a focused portfolio of resilient high-quality oil and gas projects that generate premium free cash flow. This will help meet near-term demand for secure supplies of oil and gas, generating additional earnings that can further strengthen BP and support investment in its green transition. The incremental investment will target shorter-term, fast-payback projects that maximise value and deliver rapidly with minimal new infrastructure. Oil and gas production will be around 2.3m barrels a day in 2025 and 2.0m b/d in 2030, 25% lower than in 2019.

The overall capital investment of $14bn-$18bn a year includes acquisitions, providing some reassurance the company won’t engage in large-scale, value-destroying M&A. The company is targeting group EBITDA of $46bn-$49bn in 2025 and $53bn-$58bn in 2030 in a $70/barrel oil price environment, and return on average capital employed of over 18%, which it achieved in 2023.

However, Reuters recently reported BP is planning to abandon its 2030 production target when the new CEO unveils his strategy in February. The company is also set to scale back its energy transition strategy in a bid to regain investor confidence. The company is now expected to target several new investments in the Middle East and the Gulf of Mexico to boost its oil and gas output. The change of tact comes in response to the group’s poor share price relative to industry peers as investors have questioned the company’s ability to generate a return on investment under its current strategy. In recent months the company had already paused investment in new offshore wind and biofuel projects and cut the number of low-carbon hydrogen projects down from 30 to 10.

Back to the latest results, in the three months to 30 September 2024, underlying replacement cost profit – the key measure of the group’s performance – fell by 31% to $2.3bn, although it was better than the market forecast of $2.1bn. Compared with the previous quarter, the result was down 18% and reflects weaker refining margins, a weak oil trading result, and lower liquids realisations, partly offset by higher gas realisations.

By division, the results for underlying operating profit were: gas & low carbon energy (+40%); oil production & operations (-11%); and customers & products (-81%), with the latter driven by weaker refining margins and a weak oil trading contribution. Upstream production grew by 3% to 2.4m b/d.

Cost discipline and operational performance have been strong – in this quarter, refining availability was 95.6%. The focus has now shifted to the downstream division where digitalisation could again significantly reduce the cost base.

Strategic progress has continued in the hydrocarbon business with the group signing two memorandums of understanding to join SOCAR in two exploration and development blocks offshore Azerbaijan. Momentum in low carbon areas also continued with the completion of the bp Bunge Bioenergia and Lightsource bp transactions.

Operating cash flow was strong, albeit down 22% to $6.8bn, including a working capital release of $1.4bn. The group received $290m of disposal proceeds from non-core assets in the quarter and is still targetting $2bn-$3bn for the full year and $25bn by the end of 2025.

Capital expenditure in the quarter was $4.5bn (including $0.2bn of M&A), with the full-year guidance still $16bn. The target for 2025 is also $16bn. The group has made several acquisitions in recent years, with the focus on ‘counter-cyclical opportunities’. Looking forward, although BP has the financial capacity to undertake further M&A, it only expects to make one or two purchases, ensuring corporate focus is maintained.

Net debt ticked up from $22.6bn to $24.3bn, reflecting the impact of weaker refining margins and the rephasing of $1bn of divestment proceeds into the current quarter. Gearing is 23.3% and the group remains committed to maintaining a strong investment grade credit rating.

BP targets a resilient cash balance point of around $40 per barrel Brent oil price (vs. $71 currently) and has the capacity to grow its dividend by around 4% a year at $60/barrel. Today, the group has declared a quarterly dividend of 8c, 10% higher than last year, implying a full-year yield of 6%.

In addition, the company is committed to returning at least 80% of surplus cash flow to shareholders. The group is planning $3.5bn of buybacks in the second half, with $1.75bn completed so far. For now, the guidance of $14bn of buybacks during the two years to end 2025 is unchanged, although the group has today stated that as part of the update to its medium-term plans in February 2025, the company intends to review elements of its financial guidance, including its expectations for 2025 share buybacks. Given the recent decline in the oil price and potential impact on surplus cash flow, there is a concern the buyback target will be reduced.

We believe decarbonisation can’t happen at the flick of a switch – oil and gas will remain part of the global energy mix for decades, with demand driven by population growth and higher incomes, particularly in developing countries where the desire for energy intensive goods and services like cars, international travel, and air conditioning is rising. We also believe the production of the materials needed to transition to net zero can’t happen without using hydrocarbons. At the same time, reduced investment in new production, partly because of environmental concerns, and natural decline rates, are increasingly leading to constrained supply.

Against this backdrop, BP is looking to reduce emissions in a way that delivers attractive returns for shareholders at a time of macroeconomic uncertainty. However, investor disillusion with the group’s low carbon strategy, particularly in terms of capital discipline, has had a negative impact on the share price, especially relative to the peer group, leaving them on a very undemanding valuation. Looking forward, we believe a strategic pivot back towards hydrocarbons would have a positive impact. Investors will then focus on the outlook for commodity prices and cost cutting, and the cash flow and shareholder returns generated as a result.

Source: Bloomberg